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Concerns about credit conditions and the debt ceiling debate will keep gold prices at historically elevated levels for the next few months, according to analysts.
The gold market retreated Friday as the banking fears subsided and the U.S. April employment report came in better than expected.
The U.S. unemployment rate fell back to a 53-year low of 3.4%, while the economy added 253,000 jobs last month.
“The employment market is showing clear resilience despite the drastic increase to U.S. interest rates over the last year and this resilience is going to afford Fed policymakers patience to ultimately continue to watch economic data before making any decisions over the narrative on the future monetary policy outlook,” said CompareBroker.io chief analyst Jameel Ahmad.
June Comex gold futures were last at $2,024.30 an ounce, down 1.3% on the day. This came after Comex prices tested record highs of $2,085.40 earlier in the week.
“Banking worries seem to have disappeared today. But that is a story that is not going away any time soon,” OANDA senior market analyst Edward Moya told Kitco News. “Overall, risks are to still elevated, credit conditions will continue to tighten. And with U.S. President Joe Biden meeting for debt ceiling talks. The risks will return.”
The gold market won’t face any serious obstacles until the debt ceiling issue and the banking sector turmoil are resolved, said Capital Economics commodities economist Edward Gardner.
“Concern about banks and the U.S. debt ceiling will keep the gold price historically high in the next few months. However, once these worries fade, we think that longer-term headwinds will come into play,” Gardner said Friday. “Our new indicator of financial stress in advanced economies indicates that the gold price is benefiting from safe-haven demand related to banking troubles.”
Washington is currently at a stalemate on the U.S. debt ceiling increase, which increases the risk of a default by June 1.
RBC Wealth Management warned this week that this year’s political and economic backdrop is “one of the most challenging.”
The last time the debt ceiling really shook markets was in 2011, and there are some parallels to be drawn between then and now.
“In 2011, the U.S. reached its debt ceiling on 16th May and, after much political wrangling, passed legislation to raise it on 1st August. On that date, the gold price was up by 9% month on month, which was probably in part due to U.S. government finance concerns. These same concerns have, of course, recently resurfaced,” Gardner.
These issues might plague markets for the next few months, which will keep gold around the $2,000 level, according to Capital Economics.
Capturing record highs again in the short term might be challenging, but gold will likely get there again, Moya said.
“Inflation will prove to be sticky, which will justify the Fed maintaining a higher for longer stance. But the outlook for gold is bullish. Do we recapture record high? There is a good case to be made that eventually, we will.”
Gold’s key support is currently at $1,990, and the first resistance could be at $2,040 an ounce.
“The Fed is done for now. June meeting is likely to be a pause. Gold’s key drivers will be the debt ceiling, banking concerns, and recession risks,” Moya said.
Next week’s data
Wednesday: U.S. CPI
Thursday: Bank of England rate decision, U.S. jobless claims, U.S. PPI
Friday: Michigan consumer sentiment
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